Canadian net gas exports are being boosted by supportive weather dynamics in the US. In the Midwest, low regional US inventories have seen Dawn prices fall to parity with Chicago Citygate and MichCon prices thus far in April. Without a premium to the Midwest, cross-border flows into Dawn from Michigan are 0.3 bcf/d lower y/y this month. The fall in imports has left eastern Canada reliant on storage withdrawals in April, despite moderate temperatures. If eastern Canadian storage levels deteriorate further, Dawn prices will have to be bid up in comparison with Midwest prices. By contrast, Western Canada is dealing with a multi-year low end-March carryout of 425 bcf, down by 45 bcf y/y. The need to replenish storage this summer along with less incremental gas supply should provide some support to beleaguered western Canadian hub prices. We forecast AECO will average a discount of $1.80/mmbtu to Henry Hub this summer, $0.15/mmbtu narrower y/y on higher storage injections, though NGTL maintenance could distress prices on days of heavy outage.
This spring has shown just how tightly intertwined Canadian gas balances are with the dynamics of the US gas market. Weather-related demand trends in the US Midwest and Pacific Northwest are having second-order effects on Canadian prices, given cross-border exports are the largest source of demand for Canadian supplies. In the US Midwest, a winter of polar vortex-like weather events (see Panorama: Polar pig? 24 January 2019) and a start to spring that included a freak mid-April blizzard in Chicago have kept regional storage low. Current Midwest inventories of 254 bcf are 80 bcf below the region’s five-year average. The relative strength in those US prices has closed the seasonal Dawn-Chicago and Dawn-MichCon spreads, sending less US gas into eastern Canada.
To attract US gas into eastern Canada, Dawn’s April five-year average is a $0.20/mmbtu premium to Chicago Citygate and a ten-cent premium to MichCon. To date this April, Dawn has been just one cent per mmbtu above each of the American hubs. The result has been a 0.3 bcf/d y/y drop in Canadian net imports of US gas through the St. Clair border point (a coincidental 0.3 bcf/d m/m drop). The main decline is coming from flows on NEXUS, whose deliveries onto the Vector Pipeline, which crosses the border at St. Clair, have declined by 0.2 bcf/d m/m to 0.1 bcf/d. The reduction in gas imports to eastern Canada has necessitated higher storage withdrawals at Dawn at the start of the traditional injection season.
Dawn has pulled 0.2 bcf/d from storage thus far in April, higher than the five-year average of under 0.1 bcf/d in withdrawals over the same period. This reliance on inventories comes despite limited heating demand in eastern Canada. Temperatures in Toronto have been below the five-year average on just four days in April thus far. Given the deficit of US Midwest stocks to their five-year average, regional prices are likely to remain supported due to the need to replenish inventories. We project Dawn will still reach its usual 260 bcf end-October threshold in 2019, although this is likely to require an increase in Dawn prices compared to the Midwest hubs.
US weather is altering the dynamics of the gas trade in the west as well. Western Canadian net exports are being helped by low hydro output in the US Pacific Northwest after a winter that was light on snowfall y/y. In the region—where hydro-electric power accounts for over 60% of total generation—hydro output of 50.7 GW year-to-date is down by 30% y/y. Gas burn will likely replace some of the lost hydro power, particularly Western Canadian Sedimentary Basin (WCSB) imports via Westcoast Energy’s T-South pipeline.
The five-year average indicates that just over 1.0 bcf/d of T-South’s 1.8 bcf/d total capacity (≈55%) crosses the border to the US at the Sumas border point. That capacity has been reduced to 1.4 bcf/d in 2019 as Westcoast works to repair the pipe following an October 2018 explosion. In March and April, as US hydro output has dwindled, Sumas border flows have averaged nearly 0.9 bcf/d (≈65% of T-South capacity). The strong demand from the US is likely to continue through summer 2019, given low snowpack levels that feed the Columbia River on which the major US dams lie. Per ICE, Sumas basis forecast for this summer averages a $0.50/mmbtu discount to Henry Hub. This includes premiums of $0.07 and $0.18/mmbtu in July and August respectively, when power demand reaches its peaks and Westcoast maintenance drops T-South capacity to 0.9 bcf/d. We forecast net Canadian exports to the US will drop by 0.25 bcf/d y/y to 5.1 bcf/d this summer, though this is less than the y/y drop in T-South capacity.
The main concern for Western Canadian gas balances is the region’s low storage levels, which ended March at 425 bcf, 45 bcf below 2018’s previous multi-year low. Part of that stemmed from winter production freeze-offs, which increased reliance on storage (see Monthly: Canada – A dream of spring, 27 March, 2019). February’s Alberta output of 9.7 bcf/d was down by 0.7 bcf/d y/y and represented the lowest reading for any month in the province since summer 2014. WCSB output in Q1 19 fell by 0.5 bcf/d y/y to 15.5 bcf/d, which we forecast will moderate to a 0.3 bcf/d y/y decline in injection season 2019. This will help Western Canada’s y/y inventory deficit shrink to just 5 bcf by end-October, with 605 bcf in storage.
While the y/y storage situation will stabilise by the start of winter, that 605 bcf carryout would still represent a decade low for Western Canada. Low inventories are likely to lend support to AECO prices through the end of year. We forecast AECO will average a discount of $1.80/mmbtu to Henry Hub this summer, $0.15/mmbtu narrower y/y, on the need to replenish storage.
The wild card for AECO’s price remains annual NGTL pipeline maintenance, which still has the potential to disrupt interruptible transport into storage despite projections that work will not be as disruptive y/y in summer 2019 (see E-mail alert: Blame TransCanada! ...even though 2019 pipeline maintenance set to be lighter than 2018, 10 January 2019). Thus far in April, pipeline work has only pushed AECO prices below the $0.41/mmbtu threshold for shut-ins cited by several Canadian producers on two days—the 3–4 April work offlining up to 0.4 bcf/d on the Western Alberta Mainline. How AECO responds to more intrusive maintenance, such as the work between 6–11 May to the Edson Mainline Loop restricting up to 1.5 bcf/d in NGTL flows, will determine just how much low storage can support Western Canadian prices.
|Fig 1: Dawn-Chicago pricing, $/mmbtu||Fig 2: Westcoast T-South pipeline capacity, bcf/d|
|Source: Refinitiv, Energy Aspects||Note: Unrestricted T-South capacity is 1.8 bcf/d.
Source: EIA, Energy Aspects